Founded in 1932, Ethan Allen Interiors Inc. ("Interiors") is a Delaware corporation incorporated on May 25, 1989. The consolidated financial statements include the accounts of Interiors, its wholly owned subsidiary Ethan Allen Global, Inc. ("Global"), and Global’s subsidiaries (collectively "we", "us", "our", "Ethan Allen", or the "Company"). All intercompany accounts and transactions have been eliminated in the consolidated financial statements.

We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States, which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Due to the inherent uncertainty involved in making those estimates, actual results could differ from those estimates. Areas in which significant estimates have been made include, but are not limited to, revenue recognition, the allowance for doubtful accounts receivable, inventory obsolescence, tax valuation allowances, useful lives for property, plant and equipment and definite-lived intangible assets, goodwill and indefinite-lived intangible asset impairment analyses, the evaluation of uncertain tax positions and the fair value of assets acquired and liabilities assumed in business combinations.

In our opinion, all adjustments, consisting only of normal recurring adjustments necessary for fair presentation, have been included in the consolidated financial statements. The results of operations for the three and nine months ended March 31,September 30, 2018 are not necessarily indicative of results that may be expected for the entire fiscal year. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K10-K for the year ended June 30, 2017.2018.

The Company reviews its expected annual effective income tax rates and makes changes on a quarterly basis as necessary based on certain factors such as changes in forecasted annual operating income; changes to actual or forecasted permanent book to tax differences; impacts from future tax audits with state, federal or foreign tax authorities; impacts from tax law changes; or change in judgment as to the realizability of deferred tax assets. The Company identifies items which are non-recurring in nature and treats these as discrete events. The tax effect of such items is recorded in the quarter in which the related events occur. Due to the volatility of these factors, the Company's consolidated effective income tax rate can change significantly quarter over quarter.

The Company conducts business globally and, as a result, the Company and its subsidiaries files income tax returns in the U.S. and in various state and foreign jurisdictions. In the normal course of business, the Company is subject to periodic examination in such domestic and foreign jurisdictions by tax authorities. The Company and certain subsidiaries are currently under audit in the U.S. from 20132015 through 2016. While the amount of uncertain tax impacts with respect to the entities and years under audit may change within the next twelve months, it is not anticipated that any of the changes will be significant. It is reasonably possible that some of these audits may be completed during the next twelve months and that various issues relating to uncertain tax impacts will be resolved within the next twelve months as exams are completed or as statutes expire and will impact the effective tax rate.

The Company’s consolidated effective tax rate was 31.2% and 24.4%24.9% for the three and nine months ended March 31,September 30, 2018 and 35.6% and 36.6%35.1% for the three and nine months ended March 31,September 30, 2017. The current period’s effective tax rate primarily includes tax expense on the taxable year’s net income, re-measurementtax expense on the cancelation of deferred tax assets and liabilities,stock options, and tax and interest expense on uncertain tax positions, partially offset by the reversal of and recognition of some uncertain tax positions. The prior period’s effective tax rate primarily includes tax expense on the taxable year’s net income, and tax and interest expense on uncertain tax positions partially offset by the reversal and recognitiontax benefit on the vesting of some uncertain tax positions.restricted stock units.

Effective July 1, 2017 the Company adopted ASU 2015-17, Balance Sheet Classification of Deferred Taxes, which requires the Company

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to present all deferred tax assets and liabilities as noncurrent. The Company has applied the new guidance prospectively and accordingly the prior periods balance sheets were not retrospectively adjusted. The adoption did not have a material impact on the Company’s consolidated results of operations, cash flows or financial position.Consolidated Financial Statements (Unaudited)

On December 22, 2017 H.R. 1, originally known as the Tax Cuts and Jobs Act, (the “Tax Act”) was enacted. Among the significant changes to the U.S. Internal Revenue Code, the Tax Act lowers the U.S. federal corporate income tax rate (“Federal Tax Rate”) from 35% to 21% effective January 1, 2018, introduces a limitation on the deduction of certain interest expenses, introduces a deduction for certain business capital expenditures and introduces a system of taxing foreign-sourced income from multinational corporations. The Company will computecomputed its income tax expense for the June 30, 2018 fiscal year using a blended Federal Tax Rate of 28%. The 21% Federal Tax Rate will apply to fiscal years ending June 30, 2019 and each year thereafter.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

The 28% Federal Tax Rate will apply to earnings reported for the full 2018 fiscal year. Accordingly, first quarter income previously subject to tax at the 35% Federal Tax Rate will benefit from the 28% Federal Tax Rate. The Company must re-measure its net deferred tax assets and liabilities using the Federal Tax Rate that will apply when these amounts are expected to reverse. The effect of the re-measurement is reflected entirely in the interim period that includes the enactment date and is allocated directly to income tax expense from continuing operations.

In December 2017, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No.118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act” (“SAB 118”) which addresses how a company recognizes provisional amounts when a company does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the effect of the changes in the Tax Act. The measurement period ends when a company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year.

As of March 31, 2018, the Company can determine a reasonable estimate for certain effects of tax reform and is recording that estimate as a provisional amount. The provisional re-measurement of the deferred tax assets and liabilities was adjusted downward from $2.6 million at December 31, 2017 to $2.4 million at March 31, 2018 by recording a $200K discrete tax expense which increased the effective tax rate by 5.4% in the quarter. For the fiscal year to date the provisional re-measurement has resulted in a discrete tax benefit of 7.2%. As permitted under SAB 118, we will complete the required analyses and accounting during the year ending June 30, 2018. The provisional re-measurement amount is anticipated to change as data becomes available allowing more accurate scheduling of the deferred tax assets and liabilities primarily related to depreciable assets, inventory, employee compensation and commissions. Following is a reconciliation of income tax expense (benefit) computed by applying the federal statutory income tax rate to income before taxes to actual tax expense (benefit):

At March 31, 2018 and Prior to June 30, 2017, 2018 we held$7.1 million and $7.3 million respectively, of restricted cash and investments in lieu of providing letters of credit for the benefit of the provider of our workmen’sworker’s compensation insurance and other insurance. These funds can be investedinsurance liabilities. By June 30, 2018, this obligation had been reduced to $5.9 million, which was then exchanged for a letter of credit for the benefit of this provider, and the restrictions were removed. The following table presents the components of total cash, cash equivalents, and restricted cash as set forth in high quality money market mutual funds, U.S. Treasuries and U.S. Government agency fixed income instruments, and cannot be withdrawn without the prior written consentour consolidated statements of the secured party. These assets are carried at cost, which approximates market value and are classified as long-term assets because they are not expected to be used within one year to fund operations.cash flows. See also Note 11, “Financial Instruments"12.

Inventories at September 30, 2018 and June 30, 2018 are summarized as follows (in thousands):

Total debt obligations at September 30, 2018 and June 30, 2018 consist of the following (in thousands):

The Company entered into a five year, $150 million senior secured revolving credit and term loan facility on October 21, 2014, as amended (the “Facility”). The Company intends to use the Facility for working capital and general corporate purposes, including dividend payments and share repurchases. The Facility, which expires on October 21, 2019, provided a single-draw term loan of $35 million and a revolving credit line of up to $115 million, subject to borrowing base availability. We incurred financing costs of $1.5 million under the Facility, which are being amortized by the interest method, over the remaining life of the Facility.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Inventories at March 31, 2018 and June 30, 2017 are summarized as follows (in thousands):

Total debt obligations at March 31, 2018 and June 30, 2017 consist of the following (in thousands):

The Company entered into a five year, $150 million senior secured revolving credit and term loan facility on October 21, 2014, as amended (the “Facility”). The Facility, which expires on October 21, 2019, provided a single-draw term loan of $35 million and a revolving credit line of up to $115 million, subject to borrowing base availability. We incurred financing costs of $1.5 million under the Facility. The unamortized portion is being amortized over the remaining life of the Facility.

At the Company’s option, revolving loans under the Facility bear interest, based on the average availability, at an annual rate of either (a) the London Interbank Offered rate (“LIBOR”) plus 1.5% to 1.75%, or (b) the higher of (i) the prime rate, (ii) the federal funds effective rate plus 0.50%, or (iii) LIBOR plus 1.0% plus in each case 0.5% to 0.75%.

The Company pays a commitment fee of 0.15% to 0.25% per annum on the unused portion of the Facility, and fees on issued letters of credit at an annual rate of 1.5% to 1.75% based on the average availability. Certain payments are restricted if the availability under the revolving credit line falls below 20% of the total revolving credit line, and the Company is subject to pro forma compliance with the fixed charge coverage ratio if applicable.

In fiscal 2018 the Company repaid the remaining balance of $13.8 million on the term loan with excess operating cash.

The Facility is secured by all property owned, leased or operated by the Company in the United States and includes certain real property owned by the Company and contains customary covenants which may limit the Company’s ability to incur debt; engage in mergers and consolidations; make restricted payments (including dividends and share repurchases); sell certain assets; and make investments.

The Facility includes a covenant that requires the Company to maintain a minimum fixed charge coverage ratio of 1.1 to 1.0 at all times unless the outstanding term loans areloan is less than $17.5$17.5 million and the fixed charge coverage ratio equals or exceeds 1.25 to 1.0, in which case the fixed charge coverage ratio ceases to apply and thereafter is only triggered if average monthly availability is less than 15% of the amount of the revolving credit line. The Company has met the exemption conditions and is currently exempt from the fixed charge coverage ratio covenant.

The Company intends to use the Facility for working capitalAt both September 30, 2018 and general corporate purposes, including dividend payments and share repurchases. At March 31, 2018 and June 30, 2017, 2018, there was $0.2$6.2 million and $0.1 million, respectively, of standby letters of credit outstanding under the Facility. Total availability under the Facility was $114.8$108.8 million at March 31,both September 30, 2018 and $114.9 million at June 30, 2017.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)2018.

At both March 31,September 30, 2018 and June 30, 2017, 2018, we were in compliance with all the covenants under the Facility.

The following table summarizes, as of March 31,September 30, 2018, the timing of cash payments related to our outstanding long-term debt obligations for the remaining threenine months of fiscal 2018,2019, and each of the five fiscal years subsequent to June 30, 2018, 2019, and thereafter (in thousands).

We are routinely party to various legal proceedings, including investigations or as a defendant in litigation, in the ordinary course of business. We are also subject to various federal, state and local environmental protection laws and regulations and are involved, from time to time, in investigations and proceedings regarding environmental matters. Such investigations and proceedings typically concern air emissions, water discharges, and/or management of solid and hazardous wastes. Under these laws, we and/or our subsidiaries are, or may be, required to remove or mitigate the effects on the environment of the disposal or release of certain hazardous materials.

Regulations issued under the Clean Air Act Amendments of 1990 required the industry to reformulate certain furniture finishes or institute process changes to reduce emissions of volatile organic compounds. Compliance with many of these requirements has been facilitated through the introduction of high solids coating technology and alternative formulations. In addition, we have instituted a variety of technical and procedural controls, including reformulation of finishing materials to reduce toxicity, implementation of high velocity low pressure spray systems, development of storm water protection plans and controls, and further development of related inspection/audit teams, all of which have served to reduce emissions per unit of production. We remain committed to implementing new waste minimization programs and/or enhancing existing programs with the objective of (i) reducing the total volume of waste, (ii) limiting the liability associated with waste disposal, and (iii) continuously improving environmental and job safety programs on the factory floor which serve to minimize emissions and safety risks for employees. To reduce the use of hazardous materials in the manufacturing process, we will continue to evaluate the most appropriate, cost-effective control technologies for finishing operations and production methods. We believe that our facilities are in material compliance with all such applicable laws and regulations. Our currently anticipated capital expenditures for environmental control facility matters are not material.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

On a quarterly basis, we review our litigation activities and determine if an unfavorable outcome to us is considered “remote”, “reasonably possible” or “probable” as defined by U.S. GAAP. Where we determine an unfavorable outcome is probable and is reasonably estimable, we accrue for potential litigation losses. The liability we may ultimately incur with respect to such litigation matters, in the event of a negative outcome, may be in excess of amounts currently accrued, if any; however, we do not expect that the reasonably possible outcome of these litigation matters would, individually or in the aggregate, have a material adverse effect on our financial condition, results of operations or cash flows. Where we determine an unfavorable outcome is not probable or reasonably estimable, we do not accrue for any potential litigation loss.

Although the outcome of the various claims and proceedings against us cannot be predicted with certainty, management believes that the likelihood is remote that any existing claims or proceedings, individually or in the aggregate, will have a material adverse effect on our financial position, results of operations or cash flows.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

All options are issued at the closing stock price on each grant date, and have a contractual term of 10 years. A summary of stock option activity occurring during the ninethree months ended March 31,September 30, 2018 is presented below:

A summary of non-vested stock unit award activity occurring during the ninethree months ended March 31,September 30, 2018 is presented below.

A summary of restricted stock activity occurring during the nine months ended March 31, 2018 is presented below.

At March 31,September 30, 2018, there were 1,438,4731,428,669 shares of common stock available for future issuance pursuant to the Stock Incentive Plan.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Basic and diluted earnings per share are calculated using the following weighted average share data (in thousands):

(10)     Accumulated Other Comprehensive Income

(10)	Accumulated Other Comprehensive Income

Accumulated other comprehensive income consists of foreign currency translation adjustments which are the result of changes in foreign currency exchange rates related to our operations in Canada, Belgium, Honduras, and Mexico, and exclude income taxes given that the earnings of non-U.S. subsidiaries are deemed to be reinvested for an indefinite time. The following table following sets forth the activity in accumulated other comprehensive income (loss) for the fiscal year-to-date period ended March 31,September 30, 2018 (in(in thousands).

(11)     Financial Instruments

At March 31, 2018 and June 30, 2017, $7.1 million and $7.3 million, respectively, of cash equivalents were restricted and classified as a long-term asset. We did not hold any available-for-sale securities at March 31, 2018 or June 30, 2017.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

We measure certain assets, including our cost and equity method investments, at fair value on a nonrecurring basis. These assets are recognized at fair value when they are deemed to be other-than-temporarily impaired. During the nine month period ended March 31, 2018, we did not record any other-than-temporary impairments on those assets required to be measured at fair value on a non-recurring basis.

(12)     Segment Information

(11)	Segment Information

Our wholesale and retail operating segments represent strategic business areas of our vertically integrated enterprise that operate separately and provide their own distinctive services. This vertical structure enables us to offer our complete line of home furnishings and accents more effectively while controlling quality and cost. We evaluate performance of the respective segments based upon revenues and operating income. Inter-segment transactions result, primarily, from the wholesale sale of inventory to the retail segment, including the related profit margin.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

As of March 31,September 30, 2018, the Company operated 147 design centers (our retail segment) and our independent retailers operated 160153 design centers. Our wholesale segment net sales include sales to our retail segment, which are eliminated in consolidation, sales to our independent retailers and unaffiliated third parties. Our retail segment net sales accounted for 77% of our consolidated net sales in the ninethree months ended March 31,September 30, 2018. Our wholesale segment net sales accounted for 23%. Information for the three and nine months ended March 31, 2018 and 2017 sales by product line for our wholesale segment is provided below:

The proportion of retail segment sales by these product lines for the three and nine months ended March 31, 2018 and 2017 is provided as follows:

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Segment information for the three and nine months ended March 31,September 30, 2018 and 2017 is provided below (in thousands):

(13)     Recently Adopted Accounting Pronouncements

(12)	Recently Adopted Accounting Pronouncements

In July 2015, May 2014, the FASBFinancial Accounting Standards Board (“FASB”) issued accounting standard ASU 2015-11, “Inventory (Topic 330): Simplifying2014-09, Revenue from Contracts with Customers (Accounting Standards Codification Topic 606), which requires an entity to recognize the Measurementamount of Inventory,”revenue to which states that inventory shouldit expects to be measured atentitled for the lowertransfer of costpromised goods or services to customers. The new standard supersedes virtually all existing authoritative accounting guidance on revenue recognition and net realizable value. Net realizable value is defined as estimated selling price in the ordinary courserequires additional disclosures and greater use of business, less reasonably predictable costs of completion, disposalestimates and transportation.judgments. We adopted the provisionsnew standard in the first quarter of ASU 2015-11 effective July 1, 2017, applied prospectively.fiscal 2019. We do not believereviewed substantially all of our contracts and other revenue streams and determined that while the adoption willapplication of the new standard did not have a material change in the amount of or timing for recognizing revenue, it did impact our financial statement disclosures related to revenue and related accounts. See Note 13 for information on our consolidated financial statements.these disclosures.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

In November 2015, 2016, the FASB issued ASU 2015-17, Balance Sheet Classification2016-18, Statement of Deferred Taxes, whichCash Flows (Topic 230): Restricted Cash.  It is intended to reduce diversity in the presentation of restricted cash and restricted cash equivalents in the statement.  The statement requires the Company to present all deferred tax assetsthat restricted cash and liabilitiesrestricted cash equivalents be included as noncurrent. We adopted the provisionscomponents of ASU 2015-17 effective July 1, 2017. At June 30, 2017, we had net current deferred tax assets of $3.9 million which would have been classifiedtotal cash and cash equivalents as noncurrent under the new standard.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends ASC Topic 718, Stock Compensation. The objective of this amendment is part of the FASB’s Simplification Initiative as it applies to several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classificationpresented on the statement of cash flows. WeThe Company had not previously included restricted cash as a component of cash and equivalents as presented on the statement of cash flows. The new guidance was adopted by the provisions of ASU 2016-09Company effective July 1, 2017. For the fiscal year ended June 30, 2017, the Company recorded a credit to additional paid in capital of $0.1 million that2018 under the new standard would haveretrospective adoption method, and prior year restricted cash has been recognized in income. Excess tax benefits were not material in fiscalreclassified to conform to current year 2017.presentation. See also Note 4.

(14

We implemented ASU 2014-09, Revenue from Contracts with Customers (Accounting Standards Codification Topic 606, “ASC 606”)     Subsequent Events, in the first quarter of fiscal 2019 using the cumulative effect approach, which required us to apply the new guidance retrospectively to revenue transactions completed on or after July 1, 2018. Adopting this new standard did not have a material impact on our consolidated financial statements but did result in enhanced presentation and disclosures.

SubsequentOur revenue consists substantially of product sales. We report product sales net of discounts and recognize them at the point in time when control transfers to March 31, 2018, the Company resumed repurchasing sharescustomer. For sales to our customers in our wholesale segment, control typically transfers when the open market underproduct is shipped. For sales in our retail segment, control generally transfers upon delivery to the Company’s existing share repurchase program (the “Share Repurchase Program”)customer.

Estimated refunds for returns and allowances are recorded using our historical return patterns. Under the new standard, we record estimated refunds for sales returns on a gross basis rather than on a net basis, and have recorded an asset for product we expect to receive from customers in “Prepaid expenses and other current assets”, and by April 24,a corresponding refund liability in ”accrued expenses and other current liabilities” on the Consolidated Balance Sheets. At September 30, 2018, approximately 500,000 additional sharesthese amounts were not material.

In many cases we receive deposits from customers before we have transferred control of our product to our customers, resulting in contract liabilities. These contract liabilities (“Customer Deposits”) are reported as within current liabilities on our Consolidated Balance Sheet. At the beginning of fiscal 2019, we had $61.2 million of Customer Deposits. During the quarter ended September 30, 2018, we recognized revenue of $46.7 million related to our Customer Deposits.

Upon adoption of ASC 606, we have elected the following accounting policies and practical expedients:

We recognize shipping and handling expense as fulfillment activities (rather than as a promised good or service) when the activities are performed even if those activities are performed after the control of the good has been repurchased. On April 24, 2018, transferred. Accordingly, we record the Company’s Boardexpenses for shipping and handling activities at the same time we recognize revenue.

We exclude from the measurement of Directors authorized an increase in the amount available for share repurchases under the Company’s Share Repurchase Program by approximately 2,000,000 shares. After giving effect to the increase in the authorized repurchase amount, as of April 24, 2018, approximately 3,000,000 shares may yet be purchasedtransaction price all taxes imposed on and concurrent with a specific revenue-producing transaction and collected by the Company underentity from a customer, including sales, use, excise, value-added, and franchise taxes (collectively referred to as sales taxes).

We do not adjust revenue for the Share Repurchase Program. effects of financing components if the contract has a duration of one year or less, as we believe that we will receive payment from the customer within one year of when we transfer control of the related goods.

The timing, number and amount of any shares repurchased will be determinedfollowing table disaggregates our revenue by product category by segment for the Company’s officers at their discretion, andquarter September 30, 2018:

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Upholstery furniture includes fabric-covered items such as permitted by securities laws, covenants under existing bank agreementssleepers, recliners and other legal requirements,motion furniture, chairs, ottomans, custom pillows, sofas, loveseats, cut fabrics and will be based on a numberleather.

Case goods furniture includes items such as beds, dressers, armoires, tables, chairs, buffets, entertainment units, home office furniture, and wooden accents.

Accents includes items such as window treatments and drapery hardware, wall décor, florals, lighting, clocks, mattresses, bedspreads, throws, pillows, decorative accents, area rugs, wall coverings and home and garden furnishings.

Other includes revenue for product delivery, the Ethan Allen Hotel room rentals and banquets, third-party furniture protection plans, non-inventoried parts, and consulting and other fees, net of factors, including an evaluation of general marketdiscounts, allowances and economic conditions and the trading price of the common stock. The Share Repurchase Program may be suspended or discontinued at any time without prior notice.other sales incentives.

None